Intellectual capital prospectus disclosure and post‐issue stock performance

Abstract

PurposeThe primary purpose of this paper is to investigate the association between intellectual capital disclosures in initial public offerings (IPOs) and post‐issue stock performance.Design/methodology/approachThe analysis is based on a sample of 259 IPOs listing on the Singapore Stock Exchange (SGX) between July 1, 1999 and June 30, 2005. Post‐issue stock performance is measured using market‐adjusted buy‐and‐hold returns across a 500 trading day observation window after listing. Intellectual capital disclosure is measured using an 81‐item index.FindingsThe study's major finding is a negative association between the level of intellectual capital disclosure in IPO prospectuses and post‐issue stock performance. The negative association persists regardless of industry type but is stronger for small IPOs relative to larger counterparts.Research limitations/implicationsThe study includes only Singapore IPOs within a specific timeframe concentrating on a single disclosure mechanism. Furthermore, the analysis focuses on an association rather than causal relationship.Practical implicationsThe findings imply greater intellectual capital prospectus disclosure may contribute to investor over‐optimism leading to higher IPO mispricing. As information becomes available post‐issue, and over‐optimistic expectations are not immediately met, investors aggressively discount shares leading to greater negative post‐issue stock performance for high IC disclosing IPOs. Pre‐listing owners/management may exploit the speculative environment generating higher wealth transfers from investors. Policymakers may need to introduce (some) uniform intellectual capital disclosure requirements to reduce speculative market conditions.Originality/valueThis paper documents the first study to provide empirical evidence of the association between intellectual capital disclosures and post‐issue stock performance; thus, it offers a new path for future intellectual capital disclosure research and understanding.